UK Accounting Glossary
A defined benefit plan is a type of qualified retirement plan, meaning it receives favourable tax treatment. A defined benefit plan is employer-sponsored, and the employer can deduct contributions made to the defined benefit plan. The employer contributes to the defined benefit plan based on a specific formula indicating the exact benefit an employee can expect upon retiring.
Once the employee retires, a defined benefit plan promises to pay the employee a specific amount yearly. The benefit payment under a defined benefit plan is usually based on the employee’s age, years of service and salary history. With a defined benefit plan, investment risk and portfolio management are under the company’s control. A defined benefit plan differs from many pension funds, whose payout depends to some extent on the return of the invested monies. Older employees who have worked many years for a company often prefer to be compensated for their services through a defined benefit plan.
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This glossary post was last updated: 7th February 2020.